Despite the current environment of rampant suspicion about the activities of banks and financial services companies, trust remains important in the trading world.
Lisa Utasi, director and senior trader at ClearBridge Advisors, an asset management division of Legg Mason, noted on a panel last week that the Security Traders Association motto, "dictum meum pactum," or "my word is my bond," remains the expectation and goal among traders. Utasi is president of the Security Traders Association of New York, the largest affiliate of the STA.
She spoke at Fordham University last Thursday with Marty Cunningham, president and CEO of market-making firm Hudson Securities, and Doreen Mogavero, president of Mogavero, Lee & Co., an institutional brokerage that operates from the floor of the New York Stock Exchange. The three equities traders discussed ethics.
The panel was part of a conference about regulation in the financial markets sponsored by Fordham’s College of Business Administration and accounting firm KPMG. John Tognino, chairman of Fordham’s board of trustees and a former executive vice president for global sales and member affairs at Nasdaq Stock Market, oversaw the conference.
Utasi noted that Fannie Mae, Freddie Mac, Bear Stearns, Lehman Brothers, AIG and Washington Mutual were each either "discredited and/or collapsed," because of bad judgments, lousy ethics, wrong-headed behavior and mistaken risk calculations. Ethics, she said, involves making judgments about "the rightness and wrongness of certain actions."
Utasi observed that unethical behavior is often the result of a particular corporate culture or pressure from management–if, for instance, a company is having trouble making the profits expected of the firm. Greed, she said, is another powerful motivating force.
Mogavero noted that at the NYSE there’s an expression that reflects the attitude toward wrongdoing on the exchange floor. Years ago, she said, if someone broke a rule or committed a foul on the floor, the exchange would "ring the bell on you."
Several decades back, she explained, the exchange literally rang the bell used to open and close the market to publicly announce that a broker had been caught doing something wrong. The bell signaled that the broker was no longer a worthy member of the community. "Nor," Mogavero said, "are you any good to trade with." Mogavero said she thought the last time the bell was rung on someone was in the late 1970s. Although the expression lives on, the bell-ringing practice was eventually retired.
Marty Cunningham, president and CEO of Hudson Securities, a market maker in Nasdaq and over-the-counter securities, agreed that trust is a trader’s lifeblood. For businesses, he said, the desire to create revenue must always be balanced with the need to run a company that has the trust and confidence of its employees. That balancing act can come under particular pressure when markets decline, he said.
Greed, in his view, can lead people to cross the line. "If you’re doing something you know you shouldn’t be doing, you know it in your heart of hearts," he said.
In the 1990s, Cunningham ran the Nasdaq trading operation at Charles Schwab. That group accounted for about 10 percent of Nasdaq’s volume. In 2005 he and a few colleagues bought a family-owned market-making firm and through a reverse merger brought it public. With that came "a whole new set of responsibilities," he said.
At his own firm, Cunningham said, the mantra is President Ronald Reagan’s old saw about the Soviet Union’s efforts to reduce its nuclear arsenal: "Trust, but verify." Both industry experience and principles must be used to shape behavior. Referring to regulation, Cuningham noted that "things will only get more complex, things will only get more difficult," in the current post-Madoff and post-financial-crisis environment.
Regulation was a growth industry in the early 1990s and is now again a growth industry, Cunningham said. In the wake of the 1987 stock market crash, regulators wanted to rekindle confidence among investors. They wanted to counter the "underpinning of distrust, mistrust and the great amount of speculation among investors about the legitimacy" of the markets, Cunningham said. However, regulation, in his view, doesn’t solve failings within people.
Cunningham noted that his firm is developing an "arm’s length" relationship with its regulators in this new environment of greater regulation. The goal is to provide "a demonstration and willingness to be involved" in helping remedy problems in the markets. He added that the industry cumulatively needs to "make regulation part of our lives" for investors to regain some of their lost confidence.
Floor broker Mogavero told the Fordham audience that she’s gone through her share of crises. She worked at Ivan F. Boesky & Co. in the 1980s and saw up close, as she put it, "the fallout of what bad ethics can do." Boesky had built a storied, high-flying career in merger arbitrage and was brought down in 1986 on charges of insider trading.
Mogavero recollected what Boesky later told her: "It’s like driving a race car," she remembered him saying. "You never think you’ll hit the wall. I hit the wall." She added: "And when he hit the wall, we all hit the wall."
Mogavero pointed out that trust remains a big part of the culture on the NYSE floor, where she works, despite public scandals that have cropped up every few years. She has been a member of the NYSE for 30 years.
However depleted, the NYSE floor is still a community, Mogavero said. "The sense of acceptance in the community depends on your reputation," she said. "You are immediately isolated from the community if there’s any doubt that your word isn’t your bond."
At the same time, she noted, the exchange oversees what traders do. There are cameras and microphones on the floor. Traders clock out if they leave the floor and clock back in when they return. "I’m happy to have [that oversight], because it keeps everyone honest, but I’m unhappy that we have to have it," she said.
Mogavero agreed with the other panelists that greed is an issue on Wall Street and elsewhere. But, she said, brokers can take measures appropriate to their own firms to forestall problems that could arise. Employees at her firm, she said in an example, are not paid for their individual performance, but share in profits as a group.
ClearBridge’s Utasi pointed out that all traders must make difficult decisions at times. She recalled that Raymond ("Chip") Mason, president and CEO of Legg Mason, once laid out a basic principle for making decisions in an area where some outcomes may be ethically fraught. Using the metaphor of a football field whose boundaries are drawn in lime, he’d said: "Never get chalk on your shoes." Utasi said that has proven to be a good guide.
